Educate me on Roth conversions

[Like2Plan]

Well, while we are on the inherited IRA topic..Here are a couple of scenarios.....If something unexpected to happen to you--I assume your DW will be the beneficiary of your inherited IRA (from your cousin)--that stays an inherited IRA. For your own IRAs/401ks--your wife would have the option of making those funds inherited IRAs or she could roll them over to her IRA and the funds would be treated as if she deposited them. No problem....Except that she would be filing single instead of married. So, it would be good to take a look at how RMDs would impact her. Maybe you haven't accumulated that much in pre-tax that it wouldn't be a big deal for her. (Although, if you do nothing with the pretax money, it could potentially double-a couple of times by 72.5)

The next case is if something happened to both of you and your daughter inherited all--she would have 10 years (rules still not clear as to whether it will require taking out some every year or just by year 10)--to take all the pre-tax money out of the tax advantaged accounts. (The 10 year withdrawal requirement also applies to Roths, but she wouldn't have to pay taxes on those). I know this is a secondary consideration (secondary to you and your wife's retirement), but something to take a look at.

[disneysteve]

Yes. The key is as you stated above is to do a direct trustee to trustee transfer. It is important to have the inherited IRA be properly titled also. Vanguard should be able to help you get that set up when the time comes.

Here is a helpful link: https://investor.vanguard.com/inherit/ira

Thanks. I thought so but wanted to be sure. I'll also want to combine the two accounts into one since they are both the same type of assets. I've been working to consolidate our accounts the past year but the inheritance is going to unavoidably add a few new ones.

[Like2Plan]

I will be inheriting two separate IRAs. One is self-managed with Vanguard. The other (much larger) one is in a wealth management account with Wells Fargo where he pays 1% AUM. Once I inherit the accounts, can I transfer them into a new self-managed account and get away from the paid manager? Ideally I'd like to get as much of the inheritance as possible set up at Vanguard since that's where the bulk of our existing portfolio is.

Yes. The key is as you stated above is to do a direct trustee to trustee transfer. It is important to have the inherited IRA be properly titled also. Vanguard should be able to help you get that set up when the time comes.

Here is a helpful link: https://investor.vanguard.com/inherit/ira

[disneysteve]

We've gotten off the Roth conversion topic, but it's my thread so....

I will be inheriting two separate IRAs. One is self-managed with Vanguard. The other (much larger) one is in a wealth management account with Wells Fargo where he pays 1% AUM. Once I inherit the accounts, can I transfer them into a new self-managed account and get away from the paid manager? Ideally I'd like to get as much of the inheritance as possible set up at Vanguard since that's where the bulk of our existing portfolio is.

[disneysteve]

There is a link to the
IRS single life expectancy table on this link:

https://www.fidelity.com/building-savings/learn-about-iras/inherited-ira-rmd

TBH, I don't know if those numbers are going to be updated (or have been updated).

Yep. I've looked at that before. I guess that's why I knew my life expectancy at 58 would be 27 years.

[disneysteve]

"Non-spouse and when spouse is not sole primary beneficiary. An individual non-spouse beneficiary must begin taking RMDs on the basis of his or her own life expectancy by December 31 of the year after the owner's death. Multiple beneficiaries can take RMDs on the basis of their own life expectancies if all of the beneficiaries have established separate accounts by December 31 of the year after the owner's death and starting in that year. If all multiple beneficiaries have not established separate accounts by that December 31 date, all beneficiaries must take RMDs on the basis of the oldest beneficiary's life expectancy starting in the year after the owner's death."

https://investor.vanguard.com/inherit/ira-rmd

So, remember that thread you started a while back regarding how assets keep growing? So, the RMD is based on the value of the account on 12/31 of each year.
So, for example--just using some of your numbers above. I am subtracting the RMD from the previous year and then multiplying by 7% and then dividing that total by 1 less year.
500,000 divided by 27 18,518 year 1
(481,482)*1.07) divided by 26 = 19,814 year 2
(494,371)*1.07) divided by 25 =21,201 year 3


Unfortunately, you can't convert RMDs to Roth (for any IRA-even your own). And, you can't do conversions to Roth on an inherited IRA.

All good info. Thanks.

So I can't put the RMDs into a Roth. The good news, I suppose, is that $18,500/year minus taxes would cover nearly 20% of our annual spending. Our other taxable accounts will probably throw off another $20,000 in income annually. After taxes on that we'll be around 40% of spending. If we can harvest the other 60% needed in such a way as to minimize additional taxable income (like drawing from our cash accounts and investments without large taxable gains) we should be able to stay under the ACA cap which is currently $68,960. If I retire at 58, we need to do that for 7 years. That should work if the rules stay essentially the same.

[Like2Plan]

There is a link to the
IRS single life expectancy table on this link:

https://www.fidelity.com/building-savings/learn-about-iras/inherited-ira-rmd

TBH, I don't know if those numbers are going to be updated (or have been updated).

[Like2Plan]

One other consideration.... and it could be a big one. State taxes. Something to think about if you are planning to relocate to another state after you retire.

[Like2Plan]

Yeah, I'm going to have to see how that actually plays out. If I need to take RMDs from the inherited IRAs, I'll be stuck with that taxable income whether I want it or not. I'll be inheriting about 500K in traditional IRAs. If my life expectancy is 85 (just guessing) that's 27 years so $18,500/yr (plus earnings on the account).
.

"Non-spouse and when spouse is not sole primary beneficiary. An individual non-spouse beneficiary must begin taking RMDs on the basis of his or her own life expectancy by December 31 of the year after the owner's death. Multiple beneficiaries can take RMDs on the basis of their own life expectancies if all of the beneficiaries have established separate accounts by December 31 of the year after the owner's death and starting in that year. If all multiple beneficiaries have not established separate accounts by that December 31 date, all beneficiaries must take RMDs on the basis of the oldest beneficiary's life expectancy starting in the year after the owner's death."

https://investor.vanguard.com/inherit/ira-rmd

So, remember that thread you started a while back regarding how assets keep growing? So, the RMD is based on the value of the account on 12/31 of each year.
So, for example--just using some of your numbers above. I am subtracting the RMD from the previous year and then multiplying by 7% and then dividing that total by 1 less year.
500,000 divided by 27 18,518 year 1
(481,482)*1.07) divided by 26 = 19,814 year 2
(494,371)*1.07) divided by 25 =21,201 year 3

Could I convert those RMDs to a Roth if I wanted to? I have to pay the taxes on it either way.

Unfortunately, you can't convert RMDs to Roth (for any IRA-even your own). And, you can't do conversions to Roth on an inherited IRA.

[disneysteve]

But, I think the point LAL was making in your case (even though you will have the stretch inherited IRA with RMDs based on your life span) is you will have taxable income from that source each year. (Something to keep in mind if you are trying to qualify for ACA subsidies.) Obviously, you might not want to do conversions with your own pretax accounts (more taxable income) on top of everything else if you are close to not qualifying for ACA subsidies.

Yeah, I'm going to have to see how that actually plays out. If I need to take RMDs from the inherited IRAs, I'll be stuck with that taxable income whether I want it or not. I'll be inheriting about 500K in traditional IRAs. If my life expectancy is 85 (just guessing) that's 27 years so $18,500/yr (plus earnings on the account).

Could I convert those RMDs to a Roth if I wanted to? I have to pay the taxes on it either way.

[Like2Plan]

there are so many factors involved it's really individual when it comes to this point in retirement planning.

Yes indeed. Also, the tax law can change.

[LivingAlmostLarge]

I was just reading something on that (in circumstances where you have to take it out within 10 years)--the IRS preliminary guidance was you have to take an RMD each year.

Here is a link:
The IRS released its interpretation of the SECURE Act’s rules for post-death payouts on IRAs and surprised everyone — and not in a good way!
April 12, 2021 By Ed Slott
"But in a shocker, IRS Publication 590-B says otherwise. Pages 11 and 12 provide an explanation and an example showing that beneficiaries would be subject to RMDs each year (as under the pre-SECURE Act rules) for years one through nine, and then the balance must be withdrawn in year 10. No one saw that coming! This doesn’t go along with the SECURE Act rules and committee reports, which seemed to indicate that the new 10-year rule would work like the old pre-SECURE Act five-year rule, with no annual distributions required."

https://www.investmentnews.com/irs-s...thought-205141


But, I think the point LAL was making in your case (even though you will have the stretch inherited IRA with RMDs based on your life span) is you will have taxable income from that source each year. (Something to keep in mind if you are trying to qualify for ACA subsidies.) Obviously, you might not want to do conversions with your own pretax accounts (more taxable income) on top of everything else if you are close to not qualifying for ACA subsidies.

https://www.investopedia.com/terms/s/stretch-ira.asp

there are so many factors involved it's really individual when it comes to this point in retirement planning.

[Like2Plan]

The good thing, as LAL pointed out, is that it isn't an RMD. You could wait and take it all out in year 10 (although there'd be a tax hit from that probably). It doesn't apply to me anyway, but if it did, I could retire at 58 and wait until 65 to start taking that money out after I'm on Medicare.

I was just reading something on that (in circumstances where you have to take it out within 10 years)--the IRS preliminary guidance was you have to take an RMD each year.

Here is a link:
The IRS released its interpretation of the SECURE Act’s rules for post-death payouts on IRAs and surprised everyone — and not in a good way!
April 12, 2021 By Ed Slott
"But in a shocker, IRS Publication 590-B says otherwise. Pages 11 and 12 provide an explanation and an example showing that beneficiaries would be subject to RMDs each year (as under the pre-SECURE Act rules) for years one through nine, and then the balance must be withdrawn in year 10. No one saw that coming! This doesn’t go along with the SECURE Act rules and committee reports, which seemed to indicate that the new 10-year rule would work like the old pre-SECURE Act five-year rule, with no annual distributions required."

https://www.investmentnews.com/irs-s...thought-205141


But, I think the point LAL was making in your case (even though you will have the stretch inherited IRA with RMDs based on your life span) is you will have taxable income from that source each year. (Something to keep in mind if you are trying to qualify for ACA subsidies.) Obviously, you might not want to do conversions with your own pretax accounts (more taxable income) on top of everything else if you are close to not qualifying for ACA subsidies.

https://www.investopedia.com/terms/s/stretch-ira.asp

[disneysteve]

That is a good point for folks who are trying to qualify for ACA for the pre-65 medicare retirement time frame. That will likely put a limit conversion activity, too.

The good thing, as LAL pointed out, is that it isn't an RMD. You could wait and take it all out in year 10 (although there'd be a tax hit from that probably). It doesn't apply to me anyway, but if it did, I could retire at 58 and wait until 65 to start taking that money out after I'm on Medicare.

[Like2Plan]

The10 year inherited IRA was a change recent in 2019 secure act. Before there was the stretch option. But now it's also not an RMD but you have to empty it by the end of 10 years, except in the case of your cousin you can treat it like your own but you will start "stretching" RMDs upon death. So you will already have a "level" of income you have to use against the ACA cliff for retiring early.

That is a good point for folks who are trying to qualify for ACA for the pre-65 medicare retirement time frame. That will likely put a limit conversion activity, too.